On a construction project, insurance costs, especially workers' compensation, have a significant impact on the contractor's profitability and its ability to price bids competitively. One of the most powerful drivers of those costs is the Experience Modifier, or Ex Mod for short (or EMR-Experience Modification Rating). Contractors need to understand how the Ex Mod functions on different forms of insurance programs, such as guaranteed cost and loss-sensitive, so they can optimally manage risk, maintain cost control, and be competitive.
What is an Experience Modifier (Ex Mod)?
The Ex Mod is a number that rating bureaus (such as NCCI or other state-specific bureaus) have developed that quantifies a contractor's loss history over the past compared to its industry and size average. The Ex Mod is a lagging indicator because it considers the previous three years' worth of loss experience (excluding the current year), and it weighs more heavily on claim frequency than severity.
An Ex Mod of 1.00 is a reflection of loss experience in line with the industry. A modifier of less than 1.00 (e.g., 0.85) reflects better-than-average loss experience, i.e., premium discounts and therefore rewarding safe contractors. A modifier of more than 1.00 (e.g., 1.25) reflects a worse-than-average record and implies surcharges and increased insurance premiums.
Guaranteed Cost Programs: Ex Mod Is King
In a guaranteed cost insurance program, the premium is fixed at the beginning of the policy period and not revised based on the losses of the contractor in that year. The only type of adjustments at the end of the policy period are exposure-based adjustments. The Ex Mod has a direct effect and significant impact on the initial premium.
For example, if a contractor pays a manual premium of $100,000 and their Ex Mod is 0.85, then the net premium would be $85,000. That 15% discount can really add up, especially for bidding on work where insurance is factored into bids.
As a result of this direct consequence, guaranteed cost plan contractors stand to gain from offering secure working conditions and keeping claims at a minimum, both for the short-term issues of safety concerns and to keep their Ex Mod in check and future premiums at reasonable levels. Additionally, project owners and general contractors use Ex Mods as an elimination factor on most projects, so a high Ex Mod would preclude a contractor from being eligible to bid on certain jobs.
Loss-Sensitive Programs: Real-Time Risk Takes Priority
On the other hand, loss-sensitive programs or large deductible and retrospective rating contracts, make premiums dependent on real-time loss occurrence during the policy term. Those contractors who are ready to bear higher risk for saving costs utilize these programs.
Under this program structure, the Ex Mod plays a minimal or no role in determining premium. While insurers use this as a historical indicator, the premium is driven by current loss experience. This means that every claim, especially high-frequency, low-severity ones, can immediately affect the company’s financial performance.
Although the Ex Mod may continue to be monitored for external view and qualification purposes, the focus is placed on claims handling, ongoing loss handling, and proactive safety measures that reduce actual paid losses rather than impacting future modifiers only.
Final Thoughts
In construction, the Experience Modifier remains a useful lever, especially for companies on guaranteed cost program structure where it directly affects premium and project eligibility. For insureds covered under a loss-sensitive program, the Ex Mod may have less of a monetary impact on premium, however it remains a significant measure of prior safety performance. For both, claims frequency control, a safe workplace, and aggressive loss control are the key strategies to ensure insurance affordability and competitiveness in the marketplace.
